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Content Revised 13 November 2013 by Request of Company to Remove their Named Reference

Seeing Green in a Sea of 3D Marine Seismic Blues

Volatility may be rising simply because investors must digest more information every day. ~ Alex Berenson

However beautiful the strategy, you should occasionally look at the results. ~ Winston Churchill

Marine 3D Seismic company Polarcus “threaded the needle.”  In difficult market conditions combining 3D vessel over-capacity, low oil prices and anticipation of subsequent reduced exploration spending, Polarcus delivered strong vessel utilization and profit.  How did Polarcus pull it off?  Polarcus’ relatively new CEO, Rod Starr, is clearly a big part of the reason.  He was recruited from TGS-Nopec and began his tenure with Polarcus only last February 2015.  So, kudos to him and his team.  The industry is most likely both impressed and envious of Polarcus’ performance following marine seismic 3D streamer competitor’s earnings meetings for Q3 2015.  Dolphin, performed with negative earnings and were having difficulties meeting the terms for the chartered vessels which allowed Sanco to pursue other agreements.  In another move, Dolphin is evaluating the possible sale of their multiclient library to generate much needed capital.  CGG announced that they would further reduce their fleet to five vessels, down from nine (9), and would reduce personnel by an additional 13%.  CGG’s joint-venture Seabed GeoSolutions performed positively.  CGG will reorganize and reduce their interest in contract acquisition and concentrate on high value multiclient projects.  CGG in their transition process will move away from its emphasis as a seismic acquisition company to becoming an integrated geoscience company.

Even Polarcus’ Starr seemed cautiously optimistic about the future, recognizing that duplicating or surpassing Q3 2015 performance would be challenging, at least in the near-term.  Most marine seismic acquisition companies are recognizing the reality of a prolonged downturn in exploration spending which will continue to severally impact the marine seismic sector.  At the end of Q2 2015 there was a belief that there were about 7-8 (12-streamer) vessels over-capacity in the depressed 3D acquisition market.  Even with the announced reductions there will still be over-capacity, based on earlier predictions, as conditions have continued to head south for the overall O & G industry.  This has made Polarcus’ accomplishment just that much more remarkable.  There is substantial uncertainty in the marine seismic sector.  Right now, the industry’s top executives seem to be investing a lot time and energy in negotiations with financers to subcontractors to arrange better terms which will help them weather the current storm.  With so much volatility, there is virtually no way to predict outcome with any meaningful precision.  Organizations that have a good understanding of their fundamental processes and expected outcomes will be better equipped to navigate these uncertainties.  But, with so many additional changes of personnel and equipment, along with the deteriorating market conditions, there is always increased risks exposure due to the changes made surrounded by such turbulence.

Marine 3D seismic streamer acquisition companies figured out some time ago that towing more streamers would reduce data acquisition time and operational and commercial risk exposure.  By this conventional wisdom, it was reasoned that towing capacity improved efficiency and would reduce the overall project cost.  This is only true to a point.  Investor’s, especially, are interested in knowing what the prevailing day rates for operational seismic vessels are.  Day rates are contingent on many factors, from regional geology and project objectives, geographic location, logistical infrastructure, environmental concerns, and non-seismic maritime activities, to name a few.  All of the fore-mentioned aspects of any project can vary significantly and impact the day rate.  Marine seismic company presenters are unable to answer the “day rate” question simply because it is the variation of project objectives and risks which determine the value of the day rates.  What perhaps is better understood is the vessel cost base.  For instance, charter terms and loan payments are more fixed.  Fixed expenses are predictable.  However, many seismic companies have been visiting investors, banks and lenders to try to renegotiate these terms.  Every home budgeter understands that when expenses exceed income measures need to be taken because such a situation is unsustainable in the long term.  So, the effort is being made to keep expenses down to address the lower spending levels of customers.  Even the vessel cost base is in flux when such term negotiations are in play.  However, there are covenant restrictions which also need to be considered along with renegotiating terms.

Obviously, the highest type of efficiency is that which can utilize existing material to the best advantage. ~ Jawaharlal Nehru

Dominant companies have a special responsibility to ensure that the way they do business doesn’t prevent competition… and does not harm consumers and innovation. ~ Mario Monti

Vessel towing capacity is really only a money maker for seismic companies if it is used and paid for.  There are conditions where there are time-windows when marine seismic acquisition can be carried-out, such as in the North Sea.  When vessels are in short supply and their also is a time window for data acquisition, high tow-capacity vessels can address these concerns and command a higher day rate due to the value of saving time, which can translate into saving money.  But, this is also dependent on the day rate which is influenced by the daily cost base of the operating vessel.  Also, not every contract is priced as a day rate.  Many are priced on an area rate, such as square kilometer rate, for example.  Most contracts have provisions for non-productive time, such as acquisition delays due to bad weather or cetacean migrations, as additional examples.  How such additional costs are distributed also impacts the overall project profitability.  The reality is that even with a relatively high day rate, if a project is completed without another project for the vessel to go to, the daily cost base expense accumulates.  This is why vessel utilization is so important.  Overall profitability is dependent on keeping the vessels busy.  Vessels without projects planned for them lose significant money.  It is cheaper to stack the vessels than to maintain and operate them without a project.  If the vessel cost base is lower, then the customer day rate will also be reduced.

With abundant vessel capacity, offshore license operator companies with seismic streamer data acquisition project requirements now have broader time windows to complete their surveys.  There is less pressure to complete the survey within a time window because enough vessels are not attached to projects.  As long as a lower streamer capacity vessel can complete the survey within the time window, as well as keep its rates per square kilometer lower, vessels with less towing capacity can win work.  If a 12-streamer vessel rate is less than 2/3 the rate of a 16-streamer vessel, for instance, then the two are competitive, bearing in mind the additional risk exposure which may be handled within the contract terms.  Cost pressure may devalue seismic data acquisition and data processing differentiators as well.  If the newer and more expensive higher-end capacity vessels cannot command a premium rate for efficiency, then they lose much of their competitive advantage.   In an over-capacity market, it is vessel utilization which holds the trump card, not towing efficiency.  Finishing work for a paying client with no immediate project to go to, or a long transit, is expensive, especially for the new builds which were commissioned before the dramatic down-turn in oil prices and exploration spending.

The issue is that cost base is being addressed through better charter or lending terms because margins are low, or maybe even negative.  But, depending on charter or lending terms, each marine streamer vessel has to have a low cost base to be competitive.  If operational cost base is at a very low margin, then idle vessels are essentially money losers and have to be stacked.  Stacking will also reduce future CAPEX because working equipment can be used to service vessels retained for operations.  Polarcus brought up this point during their Q3 2015 presentation.  Other players also mentioned that they will use the streamers and equipment from their stacked vessels to equip the leased Sanco vessels, barring no interruption in that transaction.  Dolphin had recently engaged both RC Greiber and Sanco regarding charter terms for their vessels.  Apparently, Dolphin did not make enough profit for the two Sanco vessels to meet their charter agreement terms.  This allowed Sanco the opportunity to charter.

Everyone – especially Dolphin – can bet that the Sanco vessels were not being chartered for free.  We will see in the coming months as the strategy affects the market.  Vessel efficiency is not needed as much as a low cost base in a sustained over-capacity market.  Even with stacked vessels, there seem to be plenty of vessels available to meet the time windows that projects require, in most cases.  Further, exploration programs are usually planned for months in advance.  The charter terms and other payments which establish the cost base combine with tow-capacity and efficiency to create value.  If there is a large differential in the cost base for higher tow-capacity vessels, then there may be no cost savings from completing projects more quickly for the customer.

It is a double-edged sword.  Vessels that can tow large streamer spreads will finish projects more quickly.  However, unless there is another project in-line to go to, there is no substantive financial benefit from such efficiency to the seismic company.  Transits cost time and fuel.  The ideal scenario is to have large projects proximate to each other which use essentially the same streamer configurations and sources.  Such opportunities are rare.  Polarcus has focused on the fundamentals of a fuel efficient uniform fleet where vessels parity allows more flexibility in switching vessels, if necessary, where vessels are closer to projects.  This reduces transit time without impacting technical specifications and objectives negatively.  This strategy was successful for Q3 2015.  CGG, along with Schlumberger’s WesternGeco will focus more on multiclient projects and value added products.  WesternGeco technology is also being used by Dolphin.  Polarcus is focused and not involved with side-shows.  This will help them for Q4 and beyond.  In a tempest, it is the fundamentals that work best to navigate.  It looks as though the storm will continue several more months.

What’s past is prologue.  ~ William Shakespeare, The Tempest

We sail within a vast sphere, ever drifting in uncertainty, driven from end to end. ~ Blaise Pascal